Trends in American Income Inequality Prior to the Recession-Becker

While median family income in the United States fell for over a decade prior to the beginning of the recession that started in late 2007, per capita incomes continued to grow during that time period. From 2000 to the beginning of 2008, American per capita GDP, after adjustment for inflation, grew at a decent pace at about 1 ½ percent per year. Per capita real consumption of both durables and non-durables, an important measure of the real incomes of individuals, also grew at a good rate until the recession. These measures suggest sizable improvements in the welfare of the average person during most of this decade, yet the median household income cited by Posner suggests the opposite. How can these conflicting conclusions be reconciled?

The data I cite are arithmetical averages, while, as Posner indicates, his data on household incomes are medians, or midpoints, of the distribution of household incomes. Trends in arithmetical average incomes and median household incomes have differed in the US for a variety of reasons. One obvious factor is changes in the degree of inequality in the distribution of earnings. Earnings inequality of full time workers did rise rapidly in the United States during the 1980s, and more slowly but significantly during the 1990s. However, inequality among different education and skill groups increased much more modestly during the first seven years of this decade than in the prior two decades.

As Posner indicates, incomes at the very high end, especially in the financial sector, did grow rapidly during the years leading up to the recession. That contributed in a modest way to the difference between the trends of average and median incomes. Other factors that helped raise inequality in median household incomes during the past 30 years include the growth in the number of households headed by a single parent to about 9% of all households. Also important has been the decline in the labor force participation of males at the lower end of the skill distribution, especially of African-American males, and the growth in earnings from the underground economy, due to illegal immigration, taxes, and regulations. Earnings from the underground economy are not included in most statistics on earnings. These and other factors explain why the number of Americans with incomes below the official poverty line seemed to increased by 15% between 2000-2006, and why by the end of 2008 over 30 million workers appeared to earn less than $10 per hour.

The best longer-term solution to the inequality problem is to reduce the fraction of Americans who dropout of high school, a theme I have continued to emphasize in various postings on our blog. This drop out fraction has been stagnant for the past several decades at about 30% for males, and a somewhat lower but still high percent for females. This is almost surely the highest fraction of high school dropouts among rich countries, and is heavily concentrated among children from African-Americans and Hispanic families. In large cities, often less than half of all the children enrolled in public schools end up graduating.

In the first half of the 20^th century, dropping out of high school reduced economic prospects, but not by so much since many good jobs were available to persons with limited education. Prospects for high school drop outs began to fade after World War II, and really fell during the past 30 years because of technological changes toward greater demand for skilled workers, shifts of the economy toward health, education, and other services that use more skilled workers, and globalization that reduced jobs in America for low skilled workers. High school drop outs now face a dismal future not only in the form of low earnings, but also poor health, less likelihood of both marrying and staying married, and worse outcomes on practically all other aspects of life in the modern world.

Probably the most fundamental cause of the continuing high drop out rates has been the large deterioration in family stability during the past 50 years. This has led, among other things, to the growth of low-income single parent families that contain about ¼ of all young children, and to the absence of the influence of fathers on the discipline and motivation of children in these households. Family stability is difficult to improve, particularly in the shorter run (although see my blog post of April 4).

However, schools can be improved relatively quickly by holding teachers and administrators up to higher standards. President Bush took important steps in this direction, and President Obama has been adding to and improving these changes by requiring even better school performance. I addition, studies have shown that charter schools, vouchers, and other ways to raise competition among schools that cater to children from poorer families contribute in important ways to better achievement scores of these children. That is why the caps placed by many states and localities on the number of charter schools-mainly under pressure from teachers unions- should be removed, as some cities are doing.

In trying to use public policies to reduce inequality, the goal should be to achieve this without reducing the efficiency of the economy. When efficiency declines, incomes of poor as well as better off households tend to fall. The great attraction of reducing the high school drop out rate, and other improvements in the school performance of children from lower income and lower educated families, is that they are likely to increase the economy's efficiency while at the same time raising incomes at the lower end of the earnings distribution.

 

Comments

[sussanlin]

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[Robert Wiblin]

Do families matter so much? Maybe not: http://en.wikipedia.org/wiki/The_Nurture_Assumption

Are charters and accountability having a good effect? Maybe not: http://www.econtalk.org/archives/2010/04/ravitch_on_educ.html

It's a shame these posts have no citations.

[jimbino]

I fail to see how not "marrying and staying married" are part of a "dismal future." Isn't it true that the brightest, best educated and most accomplished American women are among the least likely to get married or to breed?

There are loads of human endeavors that are not enhanced by marriage and breeding, as Jesus and Einstein found out.

[Jack]

"However, schools can be improved relatively quickly by holding teachers and administrators up to higher standards."

For at least the last 25 years school districts have been funded so inequitably and in the "left behind" urban or rural areas, so inadequately that virtually every state is involved in law suits about the issue.

Texas which finally lost its last delaying appeal a few years ago with the result of its 1,000 plus "districts" operating under court mandates serves as a good example of the post-desegregation game.

Texas funds most of its school budgets with property taxes, which unlike most other states, the rate is capped at 1% of valuation. This funds things fairly well in the school districts of high priced homes, though overall funding in Texas ranks 45th worst in the nation, while producing SAT scores that are 48th worst and barely higher than the Carolinas. The drop out rate exceeds the 30% mentioned by Becker by perhaps another 10%. There is next to no follow up for those leaving school to be "home schooled".

In the "districts" of low cost housing and mobile homes the 1% property tax falls well short of providing adequate funding with those living there being prevented from voting higher local taxes by state law. (Protecting those of huge landholdings and oil wealth?)

After the courts mandated living up to the creed of publically funded K-12 education for ALL of its children, the state could have finessed the added funding in a less divisive manner than, as they did, openly shift tax revenues from the above $335,000 home price districts to those of lesser means, which promptly got tagged as "Robin Hood".

Those giving lip service to "accountability and higher standards" should also point out the reality of funding in lower income areas where the educational challeges are typically higher requiring more, not less funding than in the "nice" suburban areas.

Here's a map of the US........ see how your state stacks up to the goals of educating ALL of our next generation.

http://www.schoolfunding.info/states/state_by_state.php3

[Jim]

Check ou the Christo Rey model for inner city educational success.

http://www.cristoreynetwork.org/about/index.shtml

Anyone who belives that throwing more money at public schools will "equalize" education is somewhat unrealistic. There is clearly a difference in attitude toward learning (in general) between richer and poorer districts not necessarily in the schools but in the homes. Better funding will not likely fix that. Per student funding has tripled since 2000 and still we are sayting the problem is not yet solved. See the chart linked below.

http://www.heritage.org/static/reportimages/8944CCA9757394F0CCE1821F36C34E6E.gif

[Trent Rock]

Great article!!
I never really thought about the drop out rate before :(

[Jack]

Jim: Many like to hurl the "throwing money at it" as a conversation stopper, however, that does not address the inequity and inadequacy of funding in "certain" areas. If $9,000 is close to the "right" number in nearby suburbs surely a much lesser figure is not the "right" number in inner cities or some rural areas.

States such as Texas the Carolinas and a few others who're short funding across the board and prejudicially are reaping what they sow. But, those I just mentioned add to over 10% of the nation so in addition to dragging the overall averages down, if the kids transfer to other states, those states often have to provide a means of catching up.

I was stunned to read of the tripling of costs since "2000" but looking over your charts it seems educational costs climbed about 20% for each 10 year period or 2% per year; in line with or perhaps even lagging the rate of inflation. BTW that $6,200 figure of 1984 I happen to recall would buy a new pick-up truck, while the $9200 quoted for 2004 might fall short of paying half the price of the 2004 truck.

You got me wondering if the cost of education has fallen as a percent of GDP. (likely as GDP has grown faster than the 2% per year) A quick look turned up this interesting piece on what different nations spend on education and libraies. Might help put things in perspective:

"Worldwide education and library spending

In 2001, the 29 countries covered in this report spent approximately $1.1 trillion dollars on education or roughly 4.1 percent of their collective gross domestic product. The United States spent the most on education in 2001 at roughly $500 billion, followed by Japan, Germany and France at $139 billion, $89 billion and $82 billion respectively. While the U.S. spent the most in absolute dollars, it ranked tenth in education spending as a percent of GDP at 4.8 percent. Saudi Arabia ranked first investing 9.5 percent of GDP in education. The top five include Norway, Malaysia, France and South Africa. All five countries spent in excess of 5 percent of GDP on education. The United Arab Emirates came in 29th at 1.9 percent of GDP.

Education spending per capita provides another lens to view worldwide education spending. Norway leads the group again with an estimated $2,850 per capita spent on education. The United States ranks second at approximately $1,780. The top five also include France, The Netherlands and Canada. Each spent more than $1,200 in education per capita in 2001."

......... and more:

http://www.oclc.org/reports/escan/economic/educationlibraryspending.htm

With education fitting into 4.8% while H/C costs continue to soar past 17% of GDP perhaps most of our cost containment efforts are better directed toward H/C.

[Jack]

Both Posner and Becker wrote great essays this week. Still questions remain:

"In trying to use public policies to reduce inequality, the goal should be to achieve this without reducing the efficiency of the economy. When efficiency declines, incomes of poor as well as better off households tend to fall."

Tough job improving efficiency. Even measuring individual efficiency is not easy. At the lower incomes many are just sure they can devine that their product is barely worth their daily wage and that wage has fallen as productivity increases. Far fewer seem to be able to devine whether those nearer the top are producing what they are paid or just why CEO and exec pay has increased ten-fold since 1980. Their salaries could be cut by half and they'd still be rich and very likely continue doing what they're doing and still be making multiples of what their predecessors earned.

More troubling yet is the question of "whose efficiency?" and to what end? When jobs are offshored or the financial sector parts out the whole company it's perhaps rewarding to management, the M&A boys, and perhaps even the stockholders. But, as a society it's hardly efficient to have 10% unemployed and another 10% underemployed.

Even worse in terms of efficiency than those doing nothing, is high rates of unemployment and low pay, demoralizing and alienating many who then turn to the negative productivity of criminal behavior requiring more parasitic drag from increased law enforcement burdens, the costs of prisons, and yet more single parents perhaps reduced to being welfare recipients.

When I was in school it seemed the examples of "relative advantage" went to using our natural advantage in farm commodities being sold to another nation short of food with our cash then going to a third nation for oil, diamonds or other goods we might not have. Today, it seems "natural advantage" has been largely reduced to cheap labor and miserable working conditions "the west" left behind a century ago.

It's hard to imagine that what we see is all part of the "creative destruction" meant to sweep away the old order and clear the boards for the new age. Well the destruction, creative or not, is there and we better get cracking on developing that new age.

[Brian Davis, Austin, TX]

Jack, shame on you for messin' w/ Texas! You're almost right about what our State's highest court said about the "Robin Hood" public free schools property tax - the maximum lawful tax rate became so uniformly maxed out by independent districts across the State that the Supreme Court found it to be de facto an unconstitutional STATE property tax. However, the Court declined to address the looming issue of educational adequacy. Since then the Legislature has fattened the business "franchise" tax and lowered the public school tax rate cap, this a very transitory palliative. We've been able to mimic educational adequacy by encouraging the teachers to teach to the standardized tests by which pupils' progress is measured. But what REALLY changed in Texas, and finally caught up to us, was the play-out of the old, conventionally-drilled oil & gas fields that paid for nearly everything here throughout the 20th century. We're not in same soup, yet, as California, but it's closing in. Property taxes are still high in Texas, too high. But our politicians and voters still aren't ready to amend the Constitution to authorize an income tax.

[Jack]

Brian, Ha! have liked all of your comments here. I looked into Texas education back when your "education Governor" was being foisted off on the rest of us. Somehow the constant lip service to the importance of education for our very future stops short of the disparity of funding from one district or part of town to another. From what I see of middle and upper class kids getting a fair education, if a bit defficient in history and civics, the best route to bring our average up to that of the other nations (that typically fund their schools more equitably) is that of bringing up the hindmost and doing something about the massive drop out rate.

I spend time in OK where it seems the average income is a bimodal composite of fairly low wages for most and very high incomes for a much smaller group. If Texas is somewhat the same it would seem an income tax would be a very good thing.

High property taxes? Aren't they limited to 1% of valuation?

Someday, still a bit away, my state of Alaska is going to run into the same problem as Texas of the most profitable oil having been pumped out as our huge state budget is 85% dependent on oil.

[Brian Davis, Austin, TX]

No, no analog to Prop 13 in TX. We have a catalog of exemptions but I won't take up bandwidth trying to explain them all. Trust me, property taxes are over the top if you own a home a place of business open to the public. And yes, some of our public schools and districts are real good; ironically, they don't tend to be the highest taxers and spenders. But they're still not as good as country-town public schools were in the 20's and 30's. I say that because I've seen the levels of reading and math high school kids were expected to master. When WW II broke out many young men who never attended college but had good vision were pulled out of U.S. Army training and turned into pilots and navigators because they could read, really read, and solve complex math problems. They had a chart, a compass, and a sliderule.

[Jack]

Brian: Ha! It's tough to make intergenerational comparisons and we should remember that Socrates and about every older guy since has bemoaned the next generation going to the dogs.

I'd perhaps agree that reading may well be off as kids today have so many other media options wheras many of the WWII or even later generations had only books and radio as their window on the world. We should also recall many, many draftees and volunteers being rejected for health reasons due to half-starving during the 30's and that many were completely illiterate.

Since very few attended college during the Depression years there would be a fair percentage of bright kids of only HS or less formal education. Even today there are many kids excelling in HS who'd be ready for corporate or military training, but because HS accomplishments vary so much (and unemployment enables employers to be picky) it seems they use a BA or BS as evidence of literacy and perhaps the ability to focus for four years. Take a look at the want ads and see what a bunch of mediocre, hack positions now insist on a college degree.

[Tom Grey]

Certainly the Intellectual Monopoly Protection racket that Hollywood and the gov't use to keep actors making millions to stop poor people from sharing their digital bits should be repealed, and replaced by pure prizes for quality performances and production of great digital stuff (to be shared "to each according to their desire"). Preferably by non-gov't institutions. There's no economic need for entertainers to get so much more cash than other workers.

The Financial Meltdown, with all the top Big Banks insolvent because of their trust in ever-increasing house prices, should have resulted in a huge comedown in financial over-compensation, but first Bush (with McCain), and now Obama, seem cowed by the fear of the "system" melting down, so instead of accepting a semi-market correction of bankruptcy for the rich, they were bailed out.

After 2006, there were thousands of reasonably well paid construction workers and better paid developers who lost jobs and businesses. Thousands. Because there was too much house building and housing speculation.
By 2008, there were thousands of unneeded financial workers at institutions raising money to fund the then-ended housing investment/ speculation. Both Lehman and Goldman should have disappeared, and AIG -- with the Fed loaning cash to smaller, healthy, non-CDO gambling banks if needed for system stability.
Gov't welfare for such corporations needs to end.

To be against bankruptcy for the over-paid Big Bank CEOs then, but not wanting to single them out now, seems a bit inconsistent.

An immediate way to reduce the income inequality is remove the Social Security top limit, so all wages & bonuses get stuck with the 15% (?) flat SS tax.

But the real problems are two:
a) too much gov't spending, and too many now-overpaid gov't workers;
and b) too many much lower paid workers throughout the world wanting the good manufacturing jobs. Workers both willing (as before), but also quite able (more so than before) to do a higher value job than Americans. (100 US workers * avg wage cost produce less $ value product than the same wage cost spread over 150-450 non-US workers.)

Far fewer 'new good jobs' will be located in America, if the multi-nationals can produce more for less many other places.
Slovakia, for instance (where I live now), but all of the CEE countries.

[Jack]

Tom: W/O being an apologist for the dreck being pumped out by corporate Hollywood, for every Clooney there are hundreds of workers getting sporadic work at scale along with the craftworkers. It's a risky biz and a hit film is not unlike having a hit with an Ipod or Iphone. Today it's nearly impossible to raise money for small "indie" films targeting a grown up market. But there are changes being considered such as a futures market on which the public can take positions and help to raise funds for new projects.

Ha! I too would like to see the companies harboring these WS thieves taken to the woodshed, perhaps paying punitive damages et al. But! I think the crafty sleazers have rigged things such that a bankruptcy would not claw bank their ill-gained lucre. Let's HOPE that the general rage about this taking -- still not understood "inside the beltway" creates a groundswell of support for reforms and strong regulation........ and hey! possibly even enforcement? Did you catch the recent news of "understaffed" SEC employees spending hours downloading porn that overflowed their harddrives?

But perhaps it's not over? Could civil or criminals trials result be part of the answer?

The "overpay" of most government positions are that they, to some extent, kept up with inflation while most in the private sector did not. Drag them down or lift up the private sector?

The second graph shows where the money went:

http://lanekenworthy.net/2008/03/09/the-best-inequality-graph/

It also shows why we should extend SS contributions upward as you suggest, but as the upper incomes get little use from SS the percentage should taper off at higher incomes.

I'm fairly sure America can compete but it's going to take getting our priorities right and still won't be easy.

[discount coach]

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[sesli chat]

Jack, shame on you for messin' w/ Texas! You're almost right about what our State's highest court said about the "Robin Hood" public free schools property tax - the maximum lawful tax rate became so uniformly maxed out by independent districts across the State that the Supreme Court found it to be de facto an unconstitutional STATE property tax. However, the Court declined to address the looming issue of educational adequacy. Since then the Legislature has fattened the business "franchise" tax and lowered the public school tax rate cap, this a very transitory palliative. We've been able to mimic educational adequacy by encouraging the teachers to teach to the standardized tests by which pupils' progress is measured. But what REALLY changed in Texas, and finally caught up to us, was the play-out of the old, conventionally-drilled oil & gas fields that paid for nearly everything here throughout the 20th century. We're not in same soup, yet, as California, but it's closing in. Property taxes are still high in Texas, too high. But our politicians and voters still aren't ready to amend the Constitution to authorize an income tax.

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Trends in American Income Inequality Prior to the Recession-Becker

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durables, an important measure of the real incomes of individuals, also grew at a good rate until the recession. These measures suggest sizable improvements in the welfare of the average person during most of this decade, yet the median household income cited by Posner suggests the opposite. How can these conflicting conclusions be reconciled?

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Those giving lip service to "accountability and higher standards" should also point out the reality of funding in lower income areas where the educational challeges are typically higher requiring more, not less funding than in the "nice" suburban areas.

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